Am I Negatively Biased Against American? (Ask Cranky)

I’m guessing you’ve read a lot about Hurricane Sandy this morning, so I won’t bore you with the same. (Summary: lots of cancellations, be patient.) Instead, I thought I’d talk about a short and simple note that came in recently from a reader. I decided to write an Ask Cranky post to explain myself more thoroughly.

Why are you so negatively biased against American Airlines?
Renato R.

Any time I have a string of negative posts about any one airline, this question comes up in various forms. Usually it’s an angry note that doesn’t expect a response, but that wasn’t the case here. It was a legitimate question and I’m happy to provide a legitimate answer.

The truth is that I have no negative bias against American Airlines. I do, however, have a strong negative opinion of the airline’s current management Ask Crankyteam.

American as a Shining Star
Throughout my formative years, American was THE airline to admire. While many old line carriers like Pan Am and Eastern floundered and died throughout the 1980s, American was a shining beacon of awesomeness. It had previously effectively invented the computerized reservation system. It was the first to really make a frequent flier program relevant. It perfected the hub and spoke system. And it successfully developed modern revenue management. For a kid who loved the airline business in the 1980s, American was a marvel.

Many people know CEO Bob Crandall’s name, and he deserves tremendous credit for being willing to innovate, even when things failed. Anyone remember the ill-fated value pricing blunder? How about hubs in Nashville, San Jose, and Raleigh/Durham? Oh, and buying AirCal? None of these worked out, but Crandall and his team were willing to take chances and then backtrack if they failed. What mattered was not that individual efforts failed because that happens to any innovative company, but rather that the airline’s trajectory continued upward.

And continue upward it did, but not just because of Crandall. As with any good company, it’s a team effort. Perhaps one of the airline’s most important member of the executive team was Bob Baker, the airline’s operations guru. Not only was Bob responsible for turning American into an operational king, but he was well-respected throughout the company and the industry. Had Bob been given the keys to American after Crandall retired, I can only wonder what the airline would look like today. (Sadly, Bob passed away in 2003.) But through these execs, American built the most-respected managers in the airline industry. They seemed unstoppable.

The Downfall Begins
American sat in a lofty position in this industry, but that position was squandered by management over the last 15 years. Even before Don Carty took over in 1998, things had already started to head downhill. There were still some bursts of creativity in the early days of that era, but they were largely failures that were not countered by success.

The decision to introduce More Room Throughout Coach in February 2000, for example, was innovative, but it was a flawed plan. United was lucky to stumble on Economy Plus. (It didn’t actually come up with a plan to monetize it for several years.) But the idea that American could get people to pay more across the board for coach was a real, fundamental misunderstanding of consumer behavior.

The acquisition of TWA in early 2001 was the next major misstep. TWA was in terrible financial shape and the economy had begun to tank as the .com bubble burst. The terrorist acts on September 11, 2001 just made things worse than they already were, but even without that, this wouldn’t have been a good idea.

During those dark times, management was very proud to be able to avoid bankruptcy, but it turned out that was probably the worst thing that could happen. While virtually every other legacy airline in the US was allowed to slash and burn legacy costs, including labor rates, American refused. It was a noble gesture but it simply delayed the inevitable. Ultimately, this is a crime of US bankruptcy law, but once everyone else was able to do it, American had to do it eventually as well.

Costs as a Scapegoat
The biggest problem is that this bankruptcy avoidance gave American management a bunch of excuses to use in order to avoid actually putting together a good strategy to run the airline. Sure, things looked up when a decade ago labor agreed to big givebacks to make the airline more competitive. But management blew that up when it put together large variable compensation packages for itself that meant big money while the front line gave back. That set the stage for labor unrest for a decade to come.

Was American at a disadvantage in crafting a new successful strategy? Oh sure. It couldn’t outsource as many aircraft to regional carriers as its competitors could. It had a big pension liability to fund. It simply didn’t have the flexible work rules that it would have liked. But instead of trying to make lemons out of lemonade, American kept saying the problem was one of costs and it didn’t have a strategy problem.

The Cornerstone Plan Hasn’t Worked
Unfortunately, that wasn’t true. It created a cornerstone strategy plan with emphasis on New York, LA, Miami, Chicago, and Dallas. But that has not done well.

Delta made a huge move on New York and, through some serious creativity via the US Airways slot swap, has pushed American down to a distant number three in the area behind it and United.

In Chicago, American should have been riding high off United’s disastrous operation in the summer of 2000 and its extended bankruptcy in the middle of the decade. While it made some early gains, it was never able to turn the corner. Today American faces a greater revenue share gap versus United than it did in 2000 despite all of United’s woes in the last decade.

In Los Angeles, American has tried many different things but nothing has really helped improve the airline’s position there. Too much time and effort has been wasted trying to claw forward. United continues to have the highest revenue share in the market and American has not closed the gap one bit since 2000. But instead of being a clear number two as it was, Delta’s combined position with Northwest puts it in line with a rapidly-growing Southwest just behind American. American is now just one of many competitors in the market.

Miami has clearly been the best success story. It’s certainly been helped by the booming Latin economy over the last few years. But American was not able to prevent Miami Airport from spending a silly amount of money on construction projects, making costs as high as you’ll find anywhere. I hate to think what will happen when the Latin economy finally cools off. It has to happen some day.

And in Dallas, American relied on pouring money and effort into crushing competition with the long-winded fight over the repeal of the Wright Amendment that would allow Southwest to fly beyond neighboring states from Love Field. That is money that should have been spent actually trying to compete. Dallas is now being invaded by Spirit because of the opportunity that airline saw. And Southwest will have a much bigger footprint when the final restrictions are lifted in 2014.

Failure to Invest in the Product
While American whittled away its time fighting outdated legislation in Dallas, it failed to actually improve its offering to customers around the world. Though American had been one of the few to install power outlets early on, it never kept things updated. The decision was made to keep flying MD-80s, but they were still flying around with old cigarette lighter-style emPower outlets and tired interiors. The 757s showed their age and needed attention on the inside. Only the newly-delivered 737s really showcase what a nicer experience flying can be.

Internationally, things are far worse. Around the same time United announced it was installing flat beds in business class, American opted for the already obsolete angled beds that were universally panned. Today, there still isn’t a single flat bed in business class on an American aircraft while Delta and United rapidly move toward having it on their full international fleets. And in coach, the tired 767s that do the bulk of mid- to long-haul flying still have drop down screens from a bygone era with no plans to remedy the situation until those aircraft are retired many years down the line.

Not All is Bad
I would be remiss if I didn’t acknowledge some of the successes. American’s AAdvantage program is still easily one of the best in the industry. That has been strengthened by recent leadership under Maya Leibman and now Suzanne Rubin. I also like what American’s Twitter team is doing, though that should be an internal function and not something that’s outsourced. [Update: Weber Shandwick, American’s PR agency, has informed me that the Twitter team has now transitioned to an internal American team this year.]

But these are the result of good leadership in certain areas, not at the top of the food chain. That’s where the real problem lies.

Despite all these failings, American can still become a great airline. The pieces are there, but they are just not being used properly. The most important thing that can happen in this bankruptcy is that a new management team takes over and cleans house.

The Merger is the Answer
Do I think a merger is needed? I think it can only help. Combining with US Airways, the best merger option out there, will not only provide an excellent management team, but it will also give the airline added heft in the northeast and over to Europe. It will make the airline more competitive with United and Delta.

Is it the perfect merger? No. American and Northwest would have been the perfect merger, but American management refused to bid high enough to seal the deal back in 2000. That would have been a far better use of funds than acquiring TWA. But that ship has sailed, and so American has to plot its best available course today. That course should include combining with US Airways and letting that airline’s management team create what could be one of the strongest airlines in the world.

Am I biased against American Airlines? No, but I don’t believe in the current management team. I do, however, believe in the US Airways team. I grew up in this industry working under the leadership of Doug Parker and Scott Kirby during my America West days. I was proud to be a part of the effort to turn America West into a thriving low cost carrier, and I’ve watched closely from the outside as they have carefully put together an airline in US Airways that has done incredibly well for itself.

If they take over American, you won’t see American become US Airways as the fear-mongers like to suggest. This team is too smart for that. With the assets of American, they will build something much better. I can only imagine what they can do to make it a globally competitive airline. I would think American’s oneworld partners, including British Airways, are privately thinking the same thing. It should make American loyalists happy to just think about the possibilities.

Am I biased against American? No way. In fact, I’d love to be its biggest fan….

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